Indonesia's manufacturing sector continued to contract in November 2016 (the second straight month of contraction), albeit at a slower pace. Indonesia's Nikkei Manufacturing Purchasing Managers' Index (PMI) climbed to a reading of 49.7 points last month from 48.7 points in October 2016 (a reading above 50.0 signals expansion of the manufacturing sector, while a reading below 50.0 indicates contraction). Contraction in November was largely blamed on subdued demand and floods in parts of Indonesia.

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Again concerns about Indonesia's manufacturing sector flared up after it was reported this morning that the Nikkei Indonesia manufacturing purchasing managers' index (PMI) declined to a reading of 48.7 in October 2016 (dropping significantly from 50.9 in September). It was the first time since July 2016 that Indonesia's manufacturing PMI contracted (a reading below 50.0 signals contraction). Employment, new orders as well as output all contracted in October, while pre-production stocks rose (slightly).

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Good news for Indonesia's manufacturing industry. According to the Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI), compiled by IHS Markit, Indonesia's manufacturing expanded both in terms of new orders and production (albeit at softer rates) in September 2016. Growth of new export orders in fact touched a 46-month high. Indonesia's manufacturing PMI rose to a reading of 50.9 in September, up from 50.4 in the preceding month (a reading above 50.0 indicates expansion).

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The manufacturing industry of Indonesia is in need of a boost as its contribution toward Indonesia's gross domestic product (GDP) has declined from 28.0 percent to 20.8 percent of GDP over the past decade. An underdeveloped manufacturing industry gives rise to a fragile economy as Indonesia remains highly dependent on raw commodity exports and on the services industry. This causes problems in times of low commodity prices and Indonesians' weak purchasing power. Preferably, the manufacturing sector accounts for at least 35 percent of GDP.

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Statistics Indonesia (BPS) announced on Monday (01/08) that Indonesia's inflation rate reached 0.69 percent (m/m) in July 2016, considerably below analysts' forecasts. In fact, the 0.69 percent (m/m) pace is Indonesia's lowest July inflation rate since 2012. On a year-on-year basis, Indonesian inflation eased to a seasonally adjusted 3.21 percent (y/y), from 3.45 percent (y/y) in the preceding month. Meanwhile, Indonesia's manufacturing activity plunged unexpectedly in July.

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Good news from Indonesia's manufacturing sector. Indonesia's Nikkei manufacturing purchasing managers' index (PMI) rose to a reading of 51.9 in June 2016, up from a reading of 50.6 points in the preceding month (a reading above 50.0 indicates expansion in manufacturing activity, while a reading below 50.0 signals contraction). The June reading of 51.9 was the highest reading since July 2014. Furthermore, the strongest expansion in Indonesia's payroll numbers in the survey's history occurred, while buying levels also rose markedly.

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In the first quarter of 2016 Indonesia's manufacturing activity declined 1.34 percent from the fourth quarter of 2015 according to data from Statistics Indonesia (BPS). This decline is primarily caused by weaker growth of the processed tobacco industry (-9.99 percent q/q), rubber & plastic industry (-7.66 percent q/q), paper & paper products industry (-5.73 percent q/q), the motor vehicles, trailers and semi-trailers industry (-4.54 percent q/q), and electrical equipment (-4.13 percent q/q). BPS Head Suryamin said the decline of the tobacco industry was caused by a weak harvest, not because of a rise in the tobacco tax rate.

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Industry players in Jakarta are somewhat relieved after Jakarta Governor Basuki Tjahaja Purnama (Ahok) signalled that he will allow a revision to the mandatory relocation of local industries to designated industrial zones. Based on Regional Regulation No. 1/2014 on Detailed Spatial Planning and Zoning Regulations, all local industries in Jakarta have to be (re)located into the designated industrial zones before 1 January 2017. Ahok is now expected to extend the deadline to the end of 2019.

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After having experienced 17 straight months of contraction in the manufacturing sector, the Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) survey rose to a reading of 50.6 in March 2016 from 48.7 in the preceding month (a reading above 50 indicates expansion of manufacturing activity) according to a statement released on Friday (01/04). This is very positive news although Indonesia's export performance remains in a state of decline. Manufacturing expansion was primarily caused by a rise in domestic demand.

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On 6 March 2016, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve economic matters such as the performance of the rupiah, February inflation & manufacturing activity, financial sustainability of Indonesia's health insurance program, Sukri bonds, public accountability, natural resources, and more.

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Chinese ferronickel producer Virtue Dragon Nickel Industry plans to invest USD $5 billion for the establishment of a nickel smelter, power plant and a port. Andrew Zhu, President Director at Virtue Dragon Nickel Industry said that these facilities will be built on a 500-hectares estate in Konawe (Southeast Sulawesi). Zhu said that the nickel smelter development involves three phases. In the first phase, which should be finished by the end of 2015, the smelter will have an annual ferronickel production capacity of 600,000 tons.

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Although the Indonesian rupiah exchange rate appreciated 0.86 percent to IDR 11,995 per US dollar on Friday (27/06) as economic data from China, South Korea and Taiwan sparked optimism that regional growth has picked up, the recent depreciating trend of Indonesia’s currency burdens the country’s manufacturing industry. This industry is still dependent on imports of raw materials, capital goods and auxiliary materials, which are paid using US dollars causing the domestic industry to feel the financial impact of a weaker rupiah.

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